UK inflation spike could put Carney’s hand on paper and push pound higher – Forex News PreviewPosted on November 13, 2017 at 4:07 pm GMTChristina Parthenidou, XM Investment Research Desk
Following encouraging evidence on Britain’s industrial output on Friday, the upcoming data on consumer prices on Tuesday are expected to show that British inflation continues to grow above the BOE’s target and likely pushing the pound higher. However, inflation drivers are not demand-led but a result of exchange rate weakness, challenging the BOE Governor, Mark Carney, who will be forced to write a letter to the chancellor, Philip Hammond, in case readings appear higher than the upper band of 3.0%, explaining what went wrong in constraining inflation.
Analysts project headline CPI to rise by 0.1 percentage points to 3.1% y/y in October, while the monthly gauge is expected to slow down from 0.3% to 0.2%. Excluding food and energy, the core CPI is forecasted to pick up by 2.8% y/y compared to the 2.7% seen previously. In September, inflation matched expectations, touching a five year high of 3.0% y/y as increases in energy prices and the currency’s depreciation since the Brexit vote in 2016 has lifted import prices. In addition, insufficient progress in Brexit negotiations has restricted investment activities as business leaders lack clarity on how and under what conditions their operations will run despite the UK Prime Minister, Theresa May, pledging to arrange a transitional period of two years.
With global demand supporting net trade, consumers’ confidence remaining resilient and amid a tightened labour market, the BOE decided to raise interest rates after a decade by a quarter percentage to 0.50% to return inflation back to the target despite sluggish wage growth and Brexit uncertainties lingering in the background. Moreover, the MPC members flagged that two additional quarter of a percentage point rate increases would be needed over the next two years, highlighting that any future rate hikes will be “gradual and to a limited extent”. Yet, markets considered the statement as a dovish message, driving the pound lower following the monetary policy statement.
Should headline inflation indeed surprise to the upside on Tuesday, pound/dollar, which has been moving sideways between 1.3024 and 1.3336 since the beginning of October, might target the area around the 50-day simple moving average (1.3247).
Alternatively, weaker-than-expected readings could fully reverse the uptrend from 1.2770 to 1.3656 (August 24 – September 20), shifting the focus to the lower band of the range, a level which has been repeatedly tested in the past.
Following the data, a speech given by the BOE Governor, Mark Carney at a policy panel organized by the ECB in Frankfurt could also bring some volatility to the market.GBPUSD